February 2016 Tax Snacks

February 29: 1099s and W-2s are due to IRS for those who paper-fileMarch 15: Corporate tax returns or extensions are due (for calendar-year taxpayers)March 31: 1099s and W-2s are due to IRS for those who e-file

1040 filing season is always an opportune time for criminals to prey on victims while pretending to work for the IRS, and this year is no different. The IRS and several state Attorneys General are warning that many people have received threatening phone calls from callers claiming to represent the IRS, intimidating people into obtaining prepaid debit cards to pay off tax debts. To date, around 5,000 victims have been duped into paying $26 million. We remind readers again: The IRS will not contact you by phone, and generally will contact taxpayers several times in writing before their collection efforts escalate.

To verify whether a caller’s inquiry is real, the IRS website suggests calling their toll-free number. In our experience, less time often is incurred by instead visiting a local IRS office in person. If you think the liability could be real, take a photo ID to the IRS desk, explain the issue, request a “transcript of account” for the current year and last two or three years, and ask the local IRS agent if those reports indicate a liability exists. Do not ever give out personal information to a caller!

By analogy, the IRS is off to a start this filing season that resembles a runner not only stumbling a bit from the starting block, but quickly finding out that the reason for the stumble was that the runner tied his or her shoelace to the starting block. This news seems more appropriate for The Onion than the BNN Briefing, but the former tends to produce fake news, and sadly, what you are about to read is real.

First, ID theft in the context of the IRS often involves a crook filing a fake tax return to steal the refund of an innocent taxpayer. The IRS responded to this a few years ago by offering IRS Identity Protection PINs to previous victims of IRS identity theft. Without these PINs, no future refunds will be issued.

In a stunning development, it turns out that hackers who have the technical prowess to gather enough information about you to file a fake return also have the capability to hack the IRS Identity Protection PIN database that was designed to prevent it. And that’s exactly what they did, as explained in this notice. I’m not sure what the next move is in this particular chess match, other than issuance of an “IRS Identity Theft Protection PIN Theft Protection PIN.” (All ribbing aside, any IT expert will tell you it is very difficult to stay ahead of a determined hacker, and the IRS is one of the biggest targets, because it holds significant identifying information and is also a source of funds.)

Speaking of PINs… those of you who have received such PINs (the existing real ones, not the ones I speculate may be forthcoming) should be aware that the ones assigned to you for use protecting 2015 returns mistakenly were described in IRS letters as PINs related to 2014 returns. You did not time travel, or fall asleep for a year; this was a simple typo that is explained near the top of this IRS notice.

Finally, taxpayers are told they can resume using the IRS electronic filing service, which is now up and running after an outage earlier this month resulting from what is described as a hardware failure. This occurred early in the filing season, and likely did not impact very many filers.

Maine’s lawmakers cannot agree on whether or not to follow recent federal tax law changes, and their delay is now holding up the filing of some taxpayers’ 2015 state income tax returns.

For federal purposes, the enhanced Section 179 deduction has been made permanent, and the 50% “bonus depreciation” deduction has been given a temporary stay of execution. (See this article for more details.) Just two months ago, these benefits were retroactively extended to 1/1/15, barely in time for the IRS to implement the changes in their 2015 tax returns. What has not been resolved, though, is how each state will treat these changes.

In New England, where most of our clients are located, several states employ “rolling conformity” with the federal tax code. This means that their state laws are tied to the federal laws, and when the federal rules change, the state rules automatically do too. Other states follow the federal Internal Revenue Code as of a certain previous date. New Hampshire is a good example; it is based on federal laws as of the year 2000. This means the state is almost never in conformity with federal rules, but it is very easy to plan for and understand. Both of these methods make sense, as those states never have to scramble to accommodate Washington’s whimsy.

Maine does not have a rolling conformity rule, and has not decided how to treat the latest Section 179 and bonus depreciation rules. The federal law changed, retroactively, so late in the year that if Maine was to change as a result, it would have to do so quickly to avoid filing delays. Proposed legislation exists now, but it has not been passed. Worse, the question of depreciation conformity has become very political, and is being argued in the press as much as the capital. Meanwhile, taxpayers and their advisors do not know how to proceed with 2015 returns! In many cases, we will have to advise clients to file federal returns, but put the state returns in mothballs until closer to the filing deadline, in the hope that Augusta’s leaders learn to play nice by then.

The truly shameful part of this (in addition to misleading and embellishing statements originating with some of our lawmakers), is that most of the rules in question relate solely to the timing of a deduction (which year it should be reported), rather than whether or not the deduction should be allowed at all. (For one of these deductions, Maine instead offers a credit, but the impact is nearly identical.) Hopefully this is resolved soon. March 15 and April 15 are right around the corner!

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.